Republicans are using a series of hearings on Capitol Hill this week to emphasize their opposition to the federal government’s embrace of ESG and generate conversation surrounding the once-obscure topic.
This week, the House Financial Services Committee will convene multiple hearings that dive into the machinations of environmental, social, and governance investing. Integration of ESG into the financial sector has grown enormously in recent years and Republican pushback has grown in tandem — this latest congressional foray shows that the issue will play a role in the coming elections and in legislation coming down the line.
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Rep. Bryan Steil (R-WI), a member of the committee, told the Washington Examiner during an interview ahead of the hearings that the reason ESG has become a big issue before Congress is because of just how hard the Biden administration is pushing ESG through federal agencies and the rulemaking process.
“I think it’s a pretty rational understanding to realize that not only are the American people pushing back, but members of Congress and me in particular have been bird-dogging this for some time,” Steil said.
There is one hearing set for Wednesday, two planned for Thursday, and one that will be held on Friday of this week.
While the explicit goal of the blitz is to further delve into ESG and push forward legislation addressing concerns about ESG investing and proxy voting, President Joe Biden is unlikely to back any related bills, so in a way the drive is also a messaging display and an indication of what changes might be coming should the GOP win the White House in 2024.
Will Hild, the executive director of the conservative group Consumers’ Research (which has been a major critic of ESG) said that interest and public awareness in ESG has exploded over the past couple of years, in large part due to vocal pushback from the Right, which has cast ESG as an attempt to distort the free market and, in some sense, even the culture of the U.S. through money and corporate influence.
“Basically, zero to 60,” Hild told the Washington Examiner of the growing awareness of ESG. “I mean, 18 to 24 months ago, very few people had heard or cared about ESG, didn’t really understand the ways it was impacting the average person’s life … in the last 24 months that has changed dramatically.”
Hild said that he sees ESG as a way that the Left is effecting change while circumventing the ballot box — something that has a harmful effect on the lives of investors and consumers even without them being aware.
Within the ESG bucket, a major focus of this week’s hearings is on the proxy voting process and proxy advisers. Proxy voting is a process that allows shareholders to vote on key issues while not personally attending corporations' annual shareholder meetings. Republicans have accused large asset managers, who vote proxies on behalf of their clients, of using the power to leverage ESG goals.
Hild said that proxy voting is a way that big asset managers “threaten” the boards and C-suites in corporate America. Asset managers have thousands of “corporate engagements” per year with corporate boards, anything from a phone call to an in-person meeting, where they communicate their priorities, Hild said.
“The thing that they meet on the most, the thing that they brag they have the most corporate engagements around, is around so-called net-zero policies pushing net-zero carbon emissions as a matter of policy at these companies,” he said. “And part of the way that they influence these companies is to threaten them with either voting for or supporting the creation of shareholder proposals that the board would have to fight or deal with and potentially lose.”
A priority for these congressional hearings, and an important first step, would be examining how that process might be being abused and what changes can be instituted to curb potential abuse, Hild said.
Republicans also have taken issue with proxy advisory firms, which they contend over-prioritize environmental and political goals. Hild said that there are two issues surrounding proxy advisers. The first is a structural one in that there are only two major players in the space — Glass Lewis and International Shareholder Services. The second issue is that those two firms have become “just as woke” as big asset managers like BlackRock, Hild argued.
Steil said another priority is examining the moves that federal agencies have made in the past couple of years to push ESG.
“What we’ve seen is the Left try to weaponize the federal agencies, in particular federal agencies such as the Securities and Exchange Commission and others that oversee our financial services industry to drive forward their political agenda,” Steil said.
The Wisconsin lawmaker said it is incumbent upon Congress to push back against the ESG drive by the Biden administration.
Another major target of House Republicans is the SEC’s controversial climate disclosure rule.
The rule was first proposed last March and creates guidelines for how and what companies must report to investors about how their operations affect the climate. It says companies must report direct and indirect greenhouse gas emissions — reports that would be audited by an outside party.
Self-reporting of climate information has already become commonplace in business as investors increasingly embrace ESG, although this proposal would take the trend much further by imposing reporting requirements.
The SEC organizes corporate emissions into three categories, known as scopes. Scope 1 includes direct emissions, Scope 2 refers to indirect emissions, such as those involved in the use of electricity, and Scope 3 measures the emissions of other entities, such as suppliers or customers in a company’s value chain.
The Scope 3 reporting requirement, the most controversial, is set to be phased in gradually and includes carve-outs based on the size of a company.
There is a basis of materiality in requiring disclosures, Steil explained. Basically, disclosures should be for information that is material to an average investor.
“And what we’re watching is the Left work to gut traditional understandings of materiality and declaring certain information as de facto material, meaning it’s required to be disclosed,” he said. “And so, the pushback is not saying that if it’s material to a company it shouldn’t be disclosed — it should be. It’s saying that if it’s not material to your company, we don’t need to burden every company with every disclosure under the Sun advanced by any given liberal cause of the day.”
There has also been considerable Republican opposition to ESG at the state level, particularly from GOP attorneys general and state treasurers.
For instance, in May, Oklahoma’s treasurer announced that the state would stop doing business with more than a dozen financial firms over accusations that they “boycott” the energy industry.
Gov. Ron DeSantis (R-FL) announced anti-ESG legislation in February that builds off previous actions he has taken and would prohibit the use of ESG in all investment decisions at the state and local level, ban state and local entities from any consideration of ESG in the contracting process, and block state and local governments from weighing ESG when issuing municipal bonds.
Biden was forced to make the first veto of his presidency this year after Congress passed a resolution to cancel a Labor Department rule that allows retirement plan managers to weigh ESG factors when making investments. Centrist Sens. Joe Manchin (D-WV) and Jon Tester (D-MT) joined with Republicans on the issue in the narrowly divided Senate.
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While this week is jam-packed with ESG-related hearings, the topic is expected to be explored in the coming weeks as well. Rep. Andy Barr (R-KY), the chairman of the Financial Institutions and Monetary Policy subcommittee of Financial Services, recently declared July to be “ESG month.”
“We’re tracking toward a markup of these anti-ESG bills toward the end of July,” he said.